## 1. The first Poverty Reduction Strategy Paper (PRSP) Progress Report of the

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---

### Overall assessment of the Report
- Presents a comprehensive assessment of challenges in implementing the PRSP and updates the PRSP for the period 2004–07.
- Reviews implementation of the PRSP presented to the Boards of the IMF and IDA on October 5, 2001 and October 11, 2001, respectively, and incorporates inputs from government, civil society, and the donor community.
- Key factors identified for less-than-satisfactory implementation:
  - A deterioration of the country’s fiscal position.
  - Little progress in implementing structural reforms, evidenced by deviations from economic targets and derailment of the PRGF arrangement at the end of 2001.
  - Slowdown in growth abroad and declining terms of trade.
- Maintains the original strategic objectives and long-term PRSP vision while revising several medium-term targets and intermediate indicators downward.
- Emphasized needs and measures:
  - Accelerate implementation of updated PRS policies and programs.
  - Maintain a stable macroeconomic and fiscal stance to support equitable and sustainable growth.
  - Remove institutional, legal, and administrative barriers to economic activity; strengthen the judicial system and reduce corruption; improve efficiency and effectiveness of social sector investments; modernize, increase transparency, and strengthen accountability in public administration.
  - Pursue effective decentralization from central government to municipalities to improve targeting and service delivery.
- Institutional and operational arrangements highlighted for better PRS implementation: Social Cabinet, Presidential Technical Support Unit (UNAT), PRS Consultative Council, PRS Fund, and Interinstitutional Technical Group (GTI).
- Details plans to improve donor coordination and urges realignment of donor assistance to PRS priorities and initiation of social auditing mechanisms.

### Consultation process
- Consultations broadened civic participation and continued during Report preparation under government coordination with the PRS Consultative Council.
- Workshops covered seven topics: macroeconomics and competitiveness; agriculture, food and rural development; human development; road infrastructure; governance and human rights; environment and risk management; social safety nets.
- Local governments and civil society met in nine workshops representing donors, youth and children, women, NGOs, local governments, farmers, workers, COHEP, indigenous groups (Nahoas, Pech, Tawankas, Tolupanes, Lencas, Garífunas y Chortís), and beneficiaries.
- Consultations increased civil society interest in implementation, monitoring, and evaluation; discussions addressed six PRS programmatic areas and raised issues including calls to emphasize private investment and production to achieve equitable growth.
- Some groups remained skeptical, raising concerns about the macroeconomic framework, fiscal measures (e.g., fuel tax increase), slow PRSP implementation, delays in attaining the HIPC Initiative completion point, public sector size, and tax exemptions favoring vested interests.
- Overall, most observers considered the government’s participatory approach a good-faith effort.

### Medium-term macroeconomic framework
- Macroeconomic framework agreed with Fund staff for a new PRGF arrangement for 2004–06 is fully consistent with the framework in the Report.
- The Report assumes slightly lower medium-term GDP growth projections than the PRSP: "4½ percent versus 5½ percent for 2006", owing to fiscal slippages in 2002–03, a deteriorating external environment, and reduced external financing.
- Growth strategy elements:
  - Gradual increase in fiscal savings to free resources for anti-poverty programs.
  - Stable monetary policy.
  - Comprehensive financial sector reform.
  - Further trade liberalization (notably CAFTA).
  - Revival of private investment via opening key sectors to private participation.
  - Strengthening of institutions and governance.
- Fiscal strategy targets and measures:
  - Reduce deficits in the combined public sector to "1¾ percent of GDP by 2006".
  - Expand the tax base and improve revenue administration.
  - Control expenditures via sustainable wage policy and cuts to non-priority spending.
  - Deficit financing mainly with external concessional resources to ensure debt sustainability.
- Monetary policy goal: gradual decline in inflation while preserving adequate reserve coverage.
- Analytical gaps noted:
  - Limited analysis of the relation between growth and poverty reduction and the need for in-depth analysis of poverty dynamics, sectoral and geographic distribution of growth, and labor market changes.
  - Suggestion to incorporate analysis of financial system reform impacts and access to financial services by the poor in the next PRSP progress report.
  - The Report envisages increasing the elasticity between growth and poverty reduction to "about one and one half" (it averaged "two-thirds in the 1990s") and calls for clear outlining of factors behind the targeted poverty reduction.

### PRS spending and financing
- Provides detailed spending estimates for each of the six programmatic areas and a functional classification of poverty spending.
- Estimated annual overall cost of the strategy:
  - Increase from "7½ percent of GDP in 2003" to "9¾ percent by 2007".
  - About "35 to 45 percent" of these costs expected to be covered with external resources (including HIPC debt relief, debt rescheduling, and concessional lending); the remainder is domestic effort.
  - A projected financing gap amounting to "about 1 percent of GDP a year" in "2006–07".

### Poverty reduction
- Progress has been modest: the target for extreme poverty was met in 2002 but the overall poverty target was not met.
- Preliminary results from the Permanent Multi-Purpose Household Survey (EHPM) for May 2003 indicate rebounds in both extreme and overall poverty.
- Factors contributing to poor outcomes: fiscal deterioration, slow PRSP implementation, adverse external conditions, fall in GDP per capita.
- The Report incorporates updates to improve prioritization and targeting, decentralization and service delivery, public sector management, and donor realignment.
- Statistical capacity: National Institute of Statistics (INE) improving poverty analysis and will enhance measurement through the first Living Standard Measurement Survey (LSMS).

### Targets and intermediate indicators
- Slightly over "a third" of PRSP targets have been met during PRSP implementation.
- Causes of underperformance: lower-than-envisaged economic growth and slow PRSP implementation.
- Authorities revised some medium-term targets downward (e.g., poverty and access to water) and revised upward recent improvements (e.g., overall child malnutrition and maternal mortality rates).
- Strengthened definitions of intermediate and input indicators; recommendation to develop regional indicators in the next report.
- Two new indicators adopted for equitable growth: coverage of electricity and telephone lines.
- Emphasis that achieving PRSP/MDG goals requires accelerated equitable economic growth, steady PRSP implementation, improved service delivery effectiveness and efficiency, and measures to restore private sector dynamism—particularly for small- and medium-sized enterprises.

### Policies and programs
- Three main prioritized policy areas: restoring economic dynamism and employment generation; development of human capital; and justice and personal security.
- Cross-cutting emphases: environmental sustainability and risk prevention, gender equity, and decentralization.
- Initial steps toward deconcentrating public service delivery are underway; the Report could have described the decentralization strategy and planned steps to devolve spending responsibilities to municipalities, strengthen municipal implementation capacity, and improve local expenditure control.
- Prioritization process led by authorities and enriched by PRS Consultative Council consultations with government, civil society, and donors in sectoral working groups.
- Need for greater emphasis on modernizing public administration, particularly public sector financial management and procurement.
- Operationalization needs:
  - Consolidate initial efforts to establish operational links between PRSP intermediate indicators and specific actions with measurable outputs, timelines, and funding commitments.
  - Use the national budget strategically to implement priority actions; program redesign, consolidation, or elimination may be necessary.
- CAFTA considerations:
  - CAFTA is a significant opportunity expected to: (i) boost exports by making permanent and expanding Caribbean Basin Initiative preferences; (ii) improve the investment climate and attract investment; (iii) consolidate the Central American Common Market.
  - Challenges include cushioning potential impacts on sensitive protected activities (mainly traditional agriculture), ensuring gains from freer trade benefit the majority, and analyzing potential public finance impacts once liberalization schedules are available.
  - IDA supports a Central America-wide regional study on CAFTA (including Honduras) to be completed by mid-2004 and a follow-up regional study on trade facilitation.
  - IDA and IMF staffs suggest a more in-depth analysis of fiscal implications of CAFTA and incorporation of results into the next PRSP progress report.

### FRP structure and current tracking system
- FRP established in 2002 to keep track of the fiscal savings resulting from HIPC relief and to monitor the channeling of those savings toward poverty reducing activities (Decree 70-2002).
- Official name: Fondo para la Reducción de la Pobreza (FRP).
- Operating guidelines accessible on SEFIN’s website: http://www.sefin.gob.hn/reglamentofrp.htm
- The FRP operates as an actual fund consisting of several special accounts at the Central Bank of Honduras (BCH).
- The system is adequate to track the flow of HIPC resources under the narrow definition of poverty-reducing spending adopted in the Honduras PRSP, completed in 2001.
- The Government of Honduras’ First PRSP Progress Report (paras. 96–99) presents the amounts and uses of interim HIPC relief received by Honduras during 2000–03 on the basis of the current tracking mechanism.

### Expanded definition of poverty-reducing spending and required system upgrades
- Authorities expanded the definition of poverty-reducing spending in this Report to better link spending to poverty outcomes.
- The expanded definition requires:
  - A more comprehensive tracking system that clearly identifies the evolution of overall poverty-reducing and non-poverty-reducing spending in total public spending.
  - Monitoring of overall public spending on poverty-reducing programs designed to achieve certain poverty outcomes.
  - Tracking the source and use of all FRP funds including HIPC debt relief (contrast: current narrow tracking limits sight to spending financed exclusively from HIPC relief).
- Recommended and ongoing improvements:
  - The Fund assisted authorities to identify specific steps to be taken during 2004 (including full automation of anti-poverty spending).
  - World Bank and IDB assistance to upgrade the system over the medium term.
  - The Integrated Public Financial Administration System (SIAFI) would allow tracking of the expanded definition of anti-poverty spending.
  - Public spending information from the central government as well as decentralized agencies will soon be available online.
  - A complete version of the Country Financial Accountability Assessment (CFAA), jointly supported by the World Bank and the IDB, has already been distributed.
  - Implementation of CFAA recommendations would receive financial and technical support through an IDA PRS Technical Assistance Credit currently under preparation.

### FRP reform: move to a virtual fund and related conditions
- Authorities intend to replace the poverty fund with a ‘virtual’ fund, similar to those used in other HIPC countries.
- Virtual funds track poverty spending through the ‘tagging’ of specific expenditures in the budget.
- Tagging has already been incorporated into the 2004 budget proposal and necessary legislative reforms are being prepared.
- Authorities have been advised that an adequate mechanism for tracking budgetary savings from HIPC debt relief must be operating satisfactorily to IDA before Honduras can be considered for the HIPC Completion Point.
- Reference: Joint World Bank-IMF paper on “Tracking of Poverty-Reducing Spending in Heavily Indebted Poor Countries (HIPCs),” March 27, 2001 compares virtual and poverty funds.

### Monitoring and Evaluation (SIERP, PSIA)
- A national system for monitoring PRSP indicators, the System of PRS Indicators (SIERP), has been designed; important initial steps toward an accessible baseline and targeting tool for the PRSP.
- Needs for SIERP:
  - Systematization and dissemination for wider use across national, regional, departmental, and local levels.
  - Incorporation of recent and upcoming census and survey data plus administrative records for frequent updates and periodic monitoring.
  - Use of the upcoming first LSMS to generate a poverty targeting map by combining LSMS with the population census.
  - Promotion of improvements in the quality and use of administrative data at sectoral levels to monitor progress in intermediate indicators.
  - Integration of recent updates and revisions to PRSP indicators and targets contained in the Report.
  - Full consistency with initial efforts coordinated by the Social Cabinet and UNAT to establish operational links with PRSP goals.
- Staff recommendation: dedicate further efforts to ensure updating and effective use of SIERP’s information in policy making, program selection, and monitoring and evaluation.
- PSIA activity:
  - A PSIA relevant for distributive policies has been initiated on tax reform (tax reform packages approved by congress in 2002).
  - PSIA initiated by the World Bank in close coordination with UNAT, with technical and financial support from the Bank.
  - PSIA will determine the redistributive impact on both vertical and horizontal equity, explore implementation issues (e.g., tax compliance), and suggest complementary measures to maintain neutrality or slight progressivity of taxation and complementary measures for progressive public spending.
  - Staffs suggest incorporating PSIA results in the next PRSP progress report.
  - Two other PSIAs under consideration in coordination with UNAT: one on the public investment program and another on public social service delivery.
- Footnote clarifications in the Report:
  - Vertical equity: those with greater ability to pay taxes should contribute a larger proportion of their income or wealth in taxes.
  - Horizontal equity: those with equal ability to pay taxes should pay the same proportion in taxes.

### Risks to the strategy and staff recommendations
- Identified risk categories: political, institutional, economic, and environmental.
- Key risk points:
  - Political: Need to sustain momentum from congressional approval of a new wage policy framework; continuation of national dialogue and communication strategy to strengthen support for economic reform.
  - Institutional: Weaknesses in government financial management, the judiciary, the supreme audit agency, and executing line ministries pose implementation risks; IDA’s CAS contemplates technical and financial assistance for institution building.
  - Fiscal vulnerabilities: Potential political difficulties in fully implementing expenditure-rationalization and revenue-enhancing measures; pressures from public sector labor unions and demands on non poverty-reducing spending; decentralization must be consistent with improved efficiency and not add fiscal pressure.
  - Need for fiscal contingency plans incorporating scenarios with lower-than-envisaged concessional financing and the potential impact of the financial sector reform currently underway.
  - Financial system fragilities: Vulnerabilities identified in the 2003 FSAP require implementation of planned financial system reform.
  - Growth risks: Slippages in program implementation, worse-than-expected external conditions, and natural disasters could result in lower growth and slower poverty reduction.
- Staff recommendation to authorities:
  - Incorporate analysis of these risks into the next PRSP progress report, detailing action plans to mitigate and/or avoid them and outlining measures to address possible fiscal slippages and to improve the economy’s resilience to external shocks.
  - Begin implementation to increase the likelihood of attaining PRSP/MDG goals.

### Conclusion: assessment of PRSP implementation and priorities
- The Report presents a coherent medium-term macroeconomic framework and credible efforts toward implementing the poverty reduction strategy, particularly in light of updates to the PRSP.
- Higher growth rates than the historical trend will be necessary to reach most MDGs set for 2015.
- Staffs emphasize the need for continued prudent macroeconomic policies complemented by structural reforms to raise competitiveness.
- Progress made by authorities:
  - (i) Reaching agreement, ad referendum, on a PRGF program supported by the IMF and working toward attaining critical prior actions, such as congressional approval of the wage law.
  - (ii) Reviewing PRSP implementation and updating policies, targets, and programmatic priorities through a participatory process consulting key stakeholders.
  - (iii) Significant improvements being adopted by SIAFI, although further efforts are needed in financial management and procurement.
  - (iv) Initiating a PSIA on the tax reform.
- Remaining work and priorities to be reflected in the next progress report:
  - (i) Consolidating macroeconomic stability and reducing the fiscal deficit through revenue and expenditure measures while achieving poverty-reducing spending targets agreed in the program.
  - (ii) Improving accountability and transparency in fiscal and public financial and procurement systems.
  - (iii) Implementing program prioritization at sectoral levels and applying impact and cost-effectiveness criteria.
  - (iv) Pursuing government-led efforts to realign donor assistance to support the PRSP.
  - (v) Consolidating the national system of monitoring indicators.
- Overall staff view: Honduras’ Poverty Reduction Strategy continues to articulate a sound set of policies and programs; limited progress in implementation since completion of the PRS due to policy slippages and exogenous shocks; in light of continued reforms and policy commitments, the strategy provides a credible framework for World Bank and Fund concessional assistance. Staffs recommend that the respective Executive Directors of the World Bank and the IMF reach the same conclusion.

*Source: Excerpt from IMF/World Bank report chapter on Honduras PRSP and FRP (text provided).*

### 1. The first Poverty Reduction Strategy Paper (PRSP) Progress Report of the

### _cr0512 - 1. The first Poverty Reduction Strategy Paper (PRSP) Progress Report of the

### Overall assessment of the Report
- The Report presents a comprehensive assessment of challenges in implementing the PRSP and updates the PRSP for the period 2004–07.
- It reviews implementation of the PRSP presented to the Boards of the IMF and IDA on October 5, 2001 and October 11, 2001, respectively, and incorporates inputs from government, civil society, and the donor community.
- Key factors identified for less-than-satisfactory implementation:
  - A deterioration of the country’s fiscal position.
  - Little progress in implementing structural reforms, evidenced by deviations from economic targets and derailment of the PRGF arrangement at the end of 2001.
  - Slowdown in growth abroad and declining terms of trade.
- The Report maintains the original strategic objectives and long-term PRSP vision while revising several medium-term targets and intermediate indicators downward.
- Emphasized needs and measures:
  - Accelerate implementation of updated PRS policies and programs.
  - Maintain a stable macroeconomic and fiscal stance to support equitable and sustainable growth.
  - Remove institutional, legal, and administrative barriers to economic activity; strengthen the judicial system and reduce corruption; improve efficiency and effectiveness of social sector investments; modernize, increase transparency, and strengthen accountability in public administration.
  - Pursue effective decentralization from central government to municipalities to improve targeting and service delivery.
- Institutional and operational arrangements highlighted for better PRS implementation: Social Cabinet, Presidential Technical Support Unit (UNAT), PRS Consultative Council, PRS Fund, and Interinstitutional Technical Group (GTI).
- The Report details plans to improve donor coordination and urges realignment of donor assistance to PRS priorities and initiation of social auditing mechanisms.

### Consultation process
- Consultations broadened civic participation and continued during Report preparation under government coordination with the PRS Consultative Council.
- Workshops covered seven topics: macroeconomics and competitiveness; agriculture, food and rural development; human development; road infrastructure; governance and human rights; environment and risk management; social safety nets.
- Local governments and civil society met in nine workshops representing donors, youth and children, women, NGOs, local governments, farmers, workers, COHEP, indigenous groups (Nahoas, Pech, Tawankas, Tolupanes, Lencas, Garífunas y Chortís), and beneficiaries.
- Consultations increased civil society interest in implementation, monitoring, and evaluation; discussions addressed six PRS programmatic areas and raised issues including calls to emphasize private investment and production to achieve equitable growth.
- Some groups remained skeptical, raising concerns about the macroeconomic framework, fiscal measures (e.g., fuel tax increase), slow PRSP implementation, delays in attaining the HIPC Initiative completion point, public sector size, and tax exemptions favoring vested interests.
- Overall, most observers considered the government’s participatory approach a good-faith effort.

### Medium-term macroeconomic framework
- The macroeconomic framework agreed with Fund staff for a new PRGF arrangement for 2004–06 is fully consistent with the framework in the Report.
- The Report assumes slightly lower medium-term GDP growth projections than the PRSP: "4½ percent versus 5½ percent for 2006", owing to fiscal slippages in 2002–03, a deteriorating external environment, and reduced external financing.
- Growth strategy elements:
  - Gradual increase in fiscal savings to free resources for anti-poverty programs.
  - Stable monetary policy.
  - Comprehensive financial sector reform.
  - Further trade liberalization (notably CAFTA).
  - Revival of private investment via opening key sectors to private participation.
  - Strengthening of institutions and governance.
- Fiscal strategy targets and measures:
  - Reduce deficits in the combined public sector to "1¾ percent of GDP by 2006".
  - Expand the tax base and improve revenue administration.
  - Control expenditures via sustainable wage policy and cuts to non-priority spending.
  - Deficit financing mainly with external concessional resources to ensure debt sustainability.
- Monetary policy goal: gradual decline in inflation while preserving adequate reserve coverage.
- Analytical gaps noted:
  - Limited analysis of the relation between growth and poverty reduction and the need for in-depth analysis of poverty dynamics, sectoral and geographic distribution of growth, and labor market changes.
  - Suggestion to incorporate analysis of financial system reform impacts and access to financial services by the poor in the next PRSP progress report.
  - The Report envisages increasing the elasticity between growth and poverty reduction to "about one and one half" (it averaged "two-thirds in the 1990s") and calls for clear outlining of factors behind the targeted poverty reduction.

### PRS spending and financing
- The Report provides detailed spending estimates for each of the six programmatic areas and a functional classification of poverty spending.
- Estimated annual overall cost of the strategy:
  - Increase from "7½ percent of GDP in 2003" to "9¾ percent by 2007".
  - About "35 to 45 percent" of these costs expected to be covered with external resources (including HIPC debt relief, debt rescheduling, and concessional lending); the remainder is domestic effort.
  - A projected financing gap amounting to "about 1 percent of GDP a year" in "2006–07".

### Poverty reduction
- Progress has been modest: the target for extreme poverty was met in 2002 but the overall poverty target was not met.
- Preliminary results from the Permanent Multi-Purpose Household Survey (EHPM) for May 2003 indicate rebounds in both extreme and overall poverty.
- Factors contributing to poor outcomes: fiscal deterioration, slow PRSP implementation, adverse external conditions, fall in GDP per capita.
- The Report incorporates updates to improve prioritization and targeting, decentralization and service delivery, public sector management, and donor realignment.
- Statistical capacity: National Institute of Statistics (INE) improving poverty analysis and will enhance measurement through the first Living Standard Measurement Survey (LSMS).

### Targets and intermediate indicators
- Slightly over "a third" of PRSP targets have been met during PRSP implementation.
- Causes of underperformance: lower-than-envisaged economic growth and slow PRSP implementation.
- Authorities revised some medium-term targets downward (e.g., poverty and access to water) and revised upward recent improvements (e.g., overall child malnutrition and maternal mortality rates).
- Strengthened definitions of intermediate and input indicators; recommendation to develop regional indicators in the next report.
- Two new indicators adopted for equitable growth: coverage of electricity and telephone lines.
- Emphasis that achieving PRSP/MDG goals requires accelerated equitable economic growth, steady PRSP implementation, improved service delivery effectiveness and efficiency, and measures to restore private sector dynamism—particularly for small- and medium-sized enterprises.

### Policies and programs
- Three main prioritized policy areas: restoring economic dynamism and employment generation; development of human capital; and justice and personal security.
- Cross-cutting emphases: environmental sustainability and risk prevention, gender equity, and decentralization.
- Initial steps toward deconcentrating public service delivery are underway; the Report could have described the decentralization strategy and planned steps to devolve spending responsibilities to municipalities, strengthen municipal implementation capacity, and improve local expenditure control.
- Prioritization process led by authorities and enriched by PRS Consultative Council consultations with government, civil society, and donors in sectoral working groups.
- Need for greater emphasis on modernizing public administration, particularly public sector financial management and procurement.
- Operationalization needs:
  - Consolidate initial efforts to establish operational links between PRSP intermediate indicators and specific actions with measurable outputs, timelines, and funding commitments.
  - Use the national budget strategically to implement priority actions; program redesign, consolidation, or elimination may be necessary.
- CAFTA considerations:
  - CAFTA is a significant opportunity expected to: (i) boost exports by making permanent and expanding Caribbean Basin Initiative preferences; (ii) improve the investment climate and attract investment; (iii) consolidate the Central American Common Market.
  - Challenges include cushioning potential impacts on sensitive protected activities (mainly traditional agriculture), ensuring gains from freer trade benefit the majority, and analyzing potential public finance impacts once liberalization schedules are available.
  - IDA supports a Central America-wide regional study on CAFTA (including Honduras) to be completed by mid-2004 and a follow-up regional study on trade facilitation.
  - IDA and IMF staffs suggest a more in-depth analysis of fiscal implications of CAFTA and incorporation of results into the next PRSP progress report.

*Excerpted and summarized from The first Poverty Reduction Strategy Paper (PRSP) Progress Report of the Government of Honduras (Report text provided).*

### 19.      In 2002, the authorities created a Poverty Reduction Fund (FRP)

### In 2002, the authorities created a Poverty Reduction Fund (FRP)

### FRP structure and current tracking system
- FRP established in 2002 to keep track of the fiscal savings resulting from HIPC relief and to monitor the channeling of those savings toward poverty reducing activities (Decree 70-2002).
- Official name: Fondo para la Reducción de la Pobreza (FRP).
- Operating guidelines accessible on SEFIN’s website: http://www.sefin.gob.hn/reglamentofrp.htm
- The FRP operates as an actual fund consisting of several special accounts at the Central Bank of Honduras (BCH).
- The system is adequate to track the flow of HIPC resources under the narrow definition of poverty-reducing spending adopted in the Honduras PRSP, completed in 2001.
- The Government of Honduras’ First PRSP Progress Report (paras. 96–99) presents the amounts and uses of interim HIPC relief received by Honduras during 2000–03 on the basis of the current tracking mechanism.

### Expanded definition of poverty-reducing spending and required system upgrades
- Authorities expanded the definition of poverty-reducing spending in this Report to better link spending to poverty outcomes.
- The expanded definition requires:
  - A more comprehensive tracking system that clearly identifies the evolution of overall poverty-reducing and non-poverty-reducing spending in total public spending.
  - Monitoring of overall public spending on poverty-reducing programs designed to achieve certain poverty outcomes.
  - Tracking the source and use of all FRP funds including HIPC debt relief (contrast: current narrow tracking limits sight to spending financed exclusively from HIPC relief).
- Recommended and ongoing improvements:
  - The Fund assisted authorities to identify specific steps to be taken during 2004 (including full automation of anti-poverty spending).
  - World Bank and IDB assistance to upgrade the system over the medium term.
  - The Integrated Public Financial Administration System (SIAFI) would allow tracking of the expanded definition of anti-poverty spending.
  - Public spending information from the central government as well as decentralized agencies will soon be available online.
  - A complete version of the Country Financial Accountability Assessment (CFAA), jointly supported by the World Bank and the IDB, has already been distributed.
  - Implementation of CFAA recommendations would receive financial and technical support through an IDA PRS Technical Assistance Credit currently under preparation.

### FRP reform: move to a virtual fund and related conditions
- Authorities intend to replace the poverty fund with a ‘virtual’ fund, similar to those used in other HIPC countries.
- Virtual funds track poverty spending through the ‘tagging’ of specific expenditures in the budget.
- Tagging has already been incorporated into the 2004 budget proposal and necessary legislative reforms are being prepared.
- Authorities have been advised that an adequate mechanism for tracking budgetary savings from HIPC debt relief must be operating satisfactorily to IDA before Honduras can be considered for the HIPC Completion Point.
- Reference: Joint World Bank-IMF paper on “Tracking of Poverty-Reducing Spending in Heavily Indebted Poor Countries (HIPCs),” March 27, 2001 compares virtual and poverty funds.

### Monitoring and Evaluation (SIERP, PSIA)
- A national system for monitoring PRSP indicators, the System of PRS Indicators (SIERP), has been designed; important initial steps toward an accessible baseline and targeting tool for the PRSP.
- Needs for SIERP:
  - Systematization and dissemination for wider use across national, regional, departmental, and local levels.
  - Incorporation of recent and upcoming census and survey data plus administrative records for frequent updates and periodic monitoring.
  - Use of the upcoming first LSMS to generate a poverty targeting map by combining LSMS with the population census.
  - Promotion of improvements in the quality and use of administrative data at sectoral levels to monitor progress in intermediate indicators.
  - Integration of recent updates and revisions to PRSP indicators and targets contained in the Report.
  - Full consistency with initial efforts coordinated by the Social Cabinet and UNAT to establish operational links with PRSP goals.
- Staff recommendation: dedicate further efforts to ensure updating and effective use of SIERP’s information in policy making, program selection, and monitoring and evaluation.
- PSIA activity:
  - A PSIA relevant for distributive policies has been initiated on tax reform (tax reform packages approved by congress in 2002).
  - PSIA initiated by the World Bank in close coordination with UNAT, with technical and financial support from the Bank.
  - PSIA will determine the redistributive impact on both vertical and horizontal equity, explore implementation issues (e.g., tax compliance), and suggest complementary measures to maintain neutrality or slight progressivity of taxation and complementary measures for progressive public spending.
  - Staffs suggest incorporating PSIA results in the next PRSP progress report.
  - Two other PSIAs under consideration in coordination with UNAT: one on the public investment program and another on public social service delivery.
- Footnote clarifications in the Report:
  - Vertical equity: those with greater ability to pay taxes should contribute a larger proportion of their income or wealth in taxes.
  - Horizontal equity: those with equal ability to pay taxes should pay the same proportion in taxes.

### Risks to the strategy and staff recommendations
- Identified risk categories: political, institutional, economic, and environmental.
- Key risk points:
  - Political: Need to sustain momentum from congressional approval of a new wage policy framework; continuation of national dialogue and communication strategy to strengthen support for economic reform.
  - Institutional: Weaknesses in government financial management, the judiciary, the supreme audit agency, and executing line ministries pose implementation risks; IDA’s CAS contemplates technical and financial assistance for institution building.
  - Fiscal vulnerabilities: Potential political difficulties in fully implementing expenditure-rationalization and revenue-enhancing measures; pressures from public sector labor unions and demands on non poverty-reducing spending; decentralization must be consistent with improved efficiency and not add fiscal pressure.
  - Need for fiscal contingency plans incorporating scenarios with lower-than-envisaged concessional financing and the potential impact of the financial sector reform currently underway.
  - Financial system fragilities: Vulnerabilities identified in the 2003 FSAP require implementation of planned financial system reform.
  - Growth risks: Slippages in program implementation, worse-than-expected external conditions, and natural disasters could result in lower growth and slower poverty reduction.
- Staff recommendation to authorities:
  - Incorporate analysis of these risks into the next PRSP progress report, detailing action plans to mitigate and/or avoid them and outlining measures to address possible fiscal slippages and to improve the economy’s resilience to external shocks.
  - Begin implementation to increase the likelihood of attaining PRSP/MDG goals.

### Conclusion: assessment of PRSP implementation and priorities
- The Report presents a coherent medium-term macroeconomic framework and credible efforts toward implementing the poverty reduction strategy, particularly in light of updates to the PRSP.
- Higher growth rates than the historical trend will be necessary to reach most MDGs set for 2015.
- Staffs emphasize the need for continued prudent macroeconomic policies complemented by structural reforms to raise competitiveness.
- Progress made by authorities:
  - (i) Reaching agreement, ad referendum, on a PRGF program supported by the IMF and working toward attaining critical prior actions, such as congressional approval of the wage law.
  - (ii) Reviewing PRSP implementation and updating policies, targets, and programmatic priorities through a participatory process consulting key stakeholders.
  - (iii) Significant improvements being adopted by SIAFI, although further efforts are needed in financial management and procurement.
  - (iv) Initiating a PSIA on the tax reform.
- Remaining work and priorities to be reflected in the next progress report:
  - (i) Consolidating macroeconomic stability and reducing the fiscal deficit through revenue and expenditure measures while achieving poverty-reducing spending targets agreed in the program.
  - (ii) Improving accountability and transparency in fiscal and public financial and procurement systems.
  - (iii) Implementing program prioritization at sectoral levels and applying impact and cost-effectiveness criteria.
  - (iv) Pursuing government-led efforts to realign donor assistance to support the PRSP.
  - (v) Consolidating the national system of monitoring indicators.
- Overall staff view: Honduras’ Poverty Reduction Strategy continues to articulate a sound set of policies and programs; limited progress in implementation since completion of the PRS due to policy slippages and exogenous shocks; in light of continued reforms and policy commitments, the strategy provides a credible framework for World Bank and Fund concessional assistance. Staffs recommend that the respective Executive Directors of the World Bank and the IMF reach the same conclusion.

*Source: Excerpt from IMF/World Bank report chapter on Honduras PRSP and FRP (text provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0512.pdf_